Tuesday, December 6, 2011



The Wall Street Journal reported in a page A1 article in today’s (i.e., Tuesday, 12/6’s) edition that German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to

never again pressure private investors into agreeing to voluntary losses on euro-denominated bonds.

I don’t think that’s what Ms. Merkel and Mr. Sarkozy meant; I think what they meant was that they won’t pressure private investors to agree to voluntary losses on euro-denominated bonds issued by European sovereigns. The new Dynamic Duo couldn’t possibly mean that they never want any investor to lose money on any euro-denominated bond, regardless of the issuer, ever again. Given the rabbit hole into which the world’s financial system seems to have fallen, maybe the feckless Franco-German freres did mean the latter. But let’s assume for purposes of this piece that euro-estimables were referring to sovereign credits. I digress, of course.

Mr. Sarkozy, while at least figuratively beating his chest, proclaimed

The message to investors from across the world is that in Europe we pay back our debts.”


It seems that the message to investors across the world is more like

Moral hazard be damned; toss your money at the most profligate spendthrifts you can find and we’ll make their markers good.

Some readers are doubtless saying that, in making the last statement, yours truly is merely being his usual outrageous self. Why, these guarantees, implicit or explicit, will be given only when a viable and enforceable mechanism for mandating fiscal discipline is in place. But what these ingénues seem to miss is that the pious pronouncement that “we pay back our debts” works against whatever legitimate mechanism for enforcing fiscal discipline might be put into place.

What would be the sanction against any country that decides it doesn’t want to abide by the Franco-German fiscal prescriptions? Denial of credit? Withdrawal of the guarantee? What would be the result of such a sanction? Default on the part of the miscreant debtor. Such a result would be bad enough, resulting in the impairment of pan-European credit and, possibly, the dissolution, or at least the shrinkage, of the euro that the French, Germans, and, apparently, the whole world are going through these machinations to avoid. But now that Mr. Sarkozy and Ms. Merkel, the latter of whom has a very un-German like tendency to fold like a cheap card table, have proclaimed that there can be no sovereign European default because “we pay back our debts,” such a default is unthinkable. Therefore, so is a viable mechanism for enforcing fiscal discipline.

Trying to enforce fiscal discipline under these circumstances is like holding a bomb while sitting in a room with a churlish opponent and declaring that, if he doesn’t do what you would like, you will explode the bomb, thus killing both you and your opponent. You won’t do it, and your foe knows it. So he merely laughs in your face while making a rude gesture. You, meanwhile, accede to his demands.

So the message to creditors is that every European sovereign credit is a German credit. The message to all European governments is to party on and put everything on Uncle Otto’s tab. The message to the German, French, Dutch, Finnish, etc. taxpayer, and saver, is to bend over and take another and another and another and another. And, perhaps most importantly, the message to the European Central bank is “You’ve got your fig leaf; now get those printing presses into high gear.”

And the masters of the financial universe cheer. O tempora, o mores.

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